The Miami Herald / October 19, 1998
By Larry Luxner
Despite the current economic upheaval in Brazil, U.S. foreign direct investment (FDI) in South America's largest nation grew 24% in 1997, reaching $35.7 billion at year's end. According to the U.S. Commerce Department, this was more than twice the level of three years ago.
Brazil now accounts for 53% of all U.S. FDI (and 73%) of U.S. manufacturing investment) in South America. In fact, U.S. investment in Brazil grew more than twice as fast as the worldwide average of 11%, and 50% faster than the 16% growth rate for the rest of South America.
While successful U.S. bidders in the newly privatized Telebras companies helped fuel some of that growth, new investment in manufacturing -- especially in chemicals, automobiles and food processing -- contributed almost half the total capital flow in 1997. At the moment, Brazil accounts for 4.2% of all U.S. investments abroad, and ranks fifth in the world after Great Britain, Canada, Holland and Germany.
Brazil is also the dominant member of Mercosur, a six-nation trade bloc with a population of 225 million and a Gross Domestic Product exceeding $1.2 trillion. As more and more U.S. companies invest in Mercosur, it becomes increasingly important to have a corporate strategy that addresses where and how companies should invest within this bloc; how to adjust their production plans and organizational structures, and how to revamp their marketing and distribution systems.
A new report by the Economist Intelligence Unit, "Corporate Strategies for Mercosur: Taking Advantage of Southern Cone Integration," does just that.
The 126-page study, released in September, features an analysis of country risk, manufacturing strategies, operating challenges, opportunities in strategic industries such as telecommunications, transportation and energy, and consumer-market characteristics.
The EIU report points out that car manufacturers such as Fiat, Renault and Mercedes-Benz have been pioneers in integrating crossborder operations and exporting from a Mercosur base.
"In the past, companies pursued investment strategies focused on stand-alone subsidiaries and manufacturing plants in each country of Latin America," writes EIU editor Anna Szterenfeld. "Now, within Mercosur, they can choose production sites according to comparative advantages in market size, labor costs, taxes and access to inputs, and use those facilities as a springboard to supply other Mercosur countries, Latin America and international markets."
The report includes extensive case studies of BellSouth, which earlier this year paid $2.6 billion for a license to offer cellular phone service in the São Paulo area; Titan International, which recently bought a Uruguayan tire manufacturer, and DuPont, which has consolidated most of its Mercosur production at a major factory in Paulinia, Brazil, and a smaller satellite facility in Mercedes, Argentina.
Other companies featured in case studies are Gillette, Dow Chemical, ICI, Reynolds, Toyota, Ryder, Warner-Lambert, Carrefour, Schneider Electric and Northern Telecom. Interesting tables accompany the text, explaining such variables as commercial real-estate costs in Sao Paulo and Rio de Janeiro; executive hiring and CEO compensation in Argentina; buying power in Mercosur's major consumer markets. In addition, special chapters focus on southern Brazil's attractions, upcoming electricity privatizations, Argentina as a production site and the Uruguayan automotive industry.
The EIU report may be especially timely for U.S. executives given the current economic uncertainty in Brazil. The fiscal deficit, rising unemployment and badly needed tax and social-security reforms all present major challenges for Brazilian President Fernando Henrique Cardoso, who was re-elected to a second four-year term on Oct. 4.
"Macroeconomic and political risks, and especially the disproportionately huge influence of Brazil, could present road blocks to future progress," the EIU report warns. "Serious infrastructure deficiencies, an extensive customs bureaucracy and trade disputes are other hurdles that must be overcome. Knowing how to cope with such obstacles is critical before a company can begin to adapt its investment decisions and operations to take full advantage of the opportunities emerging from Mercosur's consolidation."
The report costs $595 a copy. To order, call marketing director Kristin Agrati at (212) 554-0643 or fax her at (212) 586-1181. E-mail: email@example.com.